Men with two feet on the ground

[Everyone:  Here’s where we are on the NGDP project.  I anticipate it will take about a week to determine the best way of transferring funds to New Zealand, and whether they are tax deductible in the US. We are considering 6 contracts per quarter instead of 5.  The 6th would be a linear contract with a payout proportional to the percentage change between the first NGDP announcement (30 days after the quarter ends), and the level of one year NGDP earlier, as estimated on the very same day (thus using identical methods when changes like adding R&D to GDP have occurred.)  We are moving away from a focus on interest rate-bearing margin accounts, and toward ideas of reducing transactions costs, and/or perhaps a subsidy for winners. International money transfers to traders can be costly, are there any newer systems that are ideal?]

Nick Rowe recently pointed out that it’s not at all clear that we would even know how to recognize a central bank that was paying for government spending by printing money.  I can already anticipate some of the objections from practical men, those who earn a living in the real world. These are what Nick calls “people of the concrete steppes.”  They believe actions speak louder than words. They are scornful of all this talk of “confidence fairies,” expectations, guidance, signaling, etc., by pointy-headed intellectuals like Nick and me, working in our ivory towers.

OK, but here’s something else that all practical men of the world believe; helicopter drops “work.” Not that they necessarily create real GDP growth, but they at least create inflation.  Practical people are bored by endless debates over fiscal vs. monetary policy.  “Look you people; just get on with the job of doing a combined fiscal/monetary expansion, everyone agrees that that will work. No one doubts that if you drop a trillion dollars out of a helicopter it will create inflation.”

There is just one problem with this practical view of the world.  It’s wrong.  Not possibly wrong. Not probably wrong.  It is certainly wrong.  And we know it is wrong because Japan did drop a trillion dollars out of a helicopter and it didn’t work.  They did an almost unbelievably large money-financed fiscal expansion over the past 20 years, and got DEFLATION, something any sane economist in 1994 would have said was impossible in a modern fiat money regime with a growing money supply and big fiscal deficits.  

Japan has increased its national debt to over 240% of GDP, and even about 140% in net terms (still among the largest in the developed world.)  And while doing so they increased their monetary base enormously.  For most of the period they weren’t even paying IOR, this was truly “printing money” to pay the government’s bills (or at least looked like it.)  You want “concrete steppes?”  The paved over much of the beautiful Japanese countryside with unneeded roads, and bridges to nowhere.  Larry Summers’ dream.  The reason they got deflation is that while the people of the concrete steppes think it’s easy to tell when a government has paid for spending by printing money, it’s actually very hard.

The “tell” here showing that the Japanese government was not permanently increasing the money supply to pay for spending occurred in 2006, a relatively good year in the otherwise bleak two decades.  Inflation had risen to zero and real GDP growth had been OK for about 4 years.   The BOJ (wrongly) feared inflation, and thus began raising rates.  With higher interest rates the bloated monetary base could cause high inflation.  So at the same time the BOJ reduced the monetary base by 20%.  Japanese investors understood that the BOJ would not allow inflation.  The money supply increase had been temporary.  What looked like “concrete steppes” were actually massive fiscal stimulus accompanied by temporary currency injections.  The fiscal stimulus was real, but it’s monetary policy that drives NGDP.  And temporary monetary injections are not effective.

So all you practical men of the world who believe in concrete steppes, I ask you the following question.  Which cherished belief are you going to give up?

1.  Concrete steeps are what matters, not expectations fairies.

2.  Huge helicopter drops will always create inflation.

PS.  Perhaps I was unfair to Nick when I lumped him in with me as a pointy-headed intellectual. He does know how to fix cars.  And even I’ve spent many thousands of hours doing construction, which is more than many Boston economists.


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64 Responses to “Men with two feet on the ground”

  1. Gravatar of benjamin cole benjamin cole
    6. October 2014 at 06:08

    The Japan situation, and some recent writing by Martin Wolf, make me think that perhaps permanent quantitative easing is the answer and broadcast as such by a central bank. How about, in the United States, the Federal Reserve buys $500 billion a year in Treasury bonds and places them in the Social Security Trust Fund to offset a 50 percent reduction in FICA taxes.

  2. Gravatar of Nick Rowe Nick Rowe
    6. October 2014 at 06:34

    Thanks Scott. Great example with Japan.

    Suppose I give you an interest-free loan of $100. How much of that $100 will you spend? You ask me how long the loan is for, and I don’t tell you. But if I told you it’s forever, I have just given you $100.

  3. Gravatar of Anonymous123 Anonymous123
    6. October 2014 at 06:39

    Scott,

    So you are saying a helicopter drop would work if it were permanent?

  4. Gravatar of Nick Rowe Nick Rowe
    6. October 2014 at 06:53

    Or, better: I give you an interest-free loan of $100, but tell you I will ask for the loan back as soon as you spend it.

  5. Gravatar of Kenneth Duda Kenneth Duda
    6. October 2014 at 07:19

    Scott, as a recovering Krugmanite, I found this post eye-opening. I wanted to try out an alternate intuition for the same result and am curious about your reaction:

    The root problem of depression is that the economy has fallen into an equilibrium (of market prices, expectations, spending patterns) that includes high unemployment. Sufficient fiscal stimulus can adjust the equilibrium and harness the unemployed, but the fiscal stimulus itself is part of the new equilibrium. The fiscal stimulus can’t go on forever (or government debt reaches infinity) yet as soon as it stops, the economy reverts back to its previous equilibrium (depression) if all else is equal.

    To get out of this trap, we need to adjust equilibrium in a way where *private spending* is harnessing the unemployed. The only way to do that is to permanently boost nominal private spending (labor prices can’t fall due to nominal rigidity). The only way to permanently boost nominal private spending is to expand the monetary base to a level consistent with full employment and convince the market that this expansion is permanent. In this process, fiscal stimulus is not merely irrelevant. It actually hurts this adjustment process by making it more difficult for the central bank to locate this new equilibrium by adding noise (the effects of fiscal stimulus itself) to the market’s signals. Even if fiscal stimulus is driven by newly printed money (full-on helicopter money), if the market doesn’t believe the monetary base expansion is permanent, you can fail to adjust expectations and remain trapped in deflation forever. It is fiscal stimulus, not monetary expansion, that is impotent at the zero lower bound. Krugman has it backwards.

    How was that?

    -Ken

  6. Gravatar of John Hall John Hall
    6. October 2014 at 08:18

    Scott, that 6th contract sounds great, exactly what I would suggest.

  7. Gravatar of Peter K. Peter K.
    6. October 2014 at 09:20

    I don’t understand this. What if Japan did a large money-financed fiscal expansion and the BoJ did accommodate it rather then counteract or negate it?

    Just seems like in one instance you have the government allocating new money and in the other you have banks doing it.

  8. Gravatar of Saturos Saturos
    6. October 2014 at 10:04

    “International money transfers to traders can be costly, are there any newer systems that are ideal?”

    I will be *somewhat* irritated if the answer to this turns out to have something to do with Bitcoin.

  9. Gravatar of Steven Kopits Steven Kopits
    6. October 2014 at 10:17

    International comparison of employment to population ratios, here:

    http://www.prienga.com/blog/2014/10/6/employment-to-population-ratios

  10. Gravatar of Steven Kopits Steven Kopits
    6. October 2014 at 10:20

    Helicopter drops work. They certainly work in Argentina.

    But look, don’t sterilize money issuance. Just issue it outright. Send a check for 1 million yen to each household. Rinse, repeat. I guarantee you will get inflation.

    On the other hand, if they get inflation in Japan, then Japan is Argentina.

  11. Gravatar of Steven Kopits Steven Kopits
    6. October 2014 at 10:37

    And here’s a bit on financial repression there:

    http://noahpinionblog.blogspot.com/2012/08/financial-repression-japanese-style_13.html

  12. Gravatar of Vivian Darkbloom Vivian Darkbloom
    6. October 2014 at 11:10

    Summers and Co have a new paper out explaining how the Treasury partially offset the effects of QE on long-term interest rates:

    “We find that between two-thirds and three-quarters of the increased supply of longer-term Treasuries is explained by the dramatic growth in outstanding debt due to the large deficits associated with the Great Recession. The remaining one-quarter to one-third is due to the Treasury’s active policy of extending the average maturity of the debt.” In other words, Treasury was working at cross purposes to the Fed.

    http://www.brookings.edu/~/media/research/files/papers/2014/09/30_government_debt_management_zlb/30_government_debt_management_zlb.pdf

    The reference to “growth in outstanding debt due to the large deficits associated with the Great Recession”, particularly the “associated with” part, is wonderfully ambiguous. To be sure, the large deficits were due in large part to lower tax revenues and higher stabilizer payments because of lower economic activity. However, an inescapable conclusion from the paper would also be that the debt-financed fiscal stimulus also contributed to offset the efficacy of monetary stimulus. Who, exactly, is offsetting whom? This issue was not, to my knowledge, directly addressed in the earlier paper by Summers and DeLong on “Fiscal Policy in a Depressed Economy”. I recall them talking about monetary offset of fiscal policy but not fiscal offset of monetary. On net, should this increase or decrease their earlier estimate of the “fiscal multiplier” at the lower zero bound? Perhaps that earlier paper needs to be revisited.

  13. Gravatar of ssumner ssumner
    6. October 2014 at 11:20

    Ben, The easiest way to do that is better signalling–less QE is needed.

    Thanks Nick, and good example.

    Anonymous, Yes, although if the liquidity trap is permanent then the effect may be much smaller than you’d hope.

    Ken, The first of your two bigger paragraphs seems exactly right to me, and is a good way of thinking about it.

    The second is mostly my way of looking at things, but perhaps a bit too anti-Keynesian. Fiscal stimulus is not identical to more government spending, although it might be. Thus while deficit spending is unsustainable, as you say, you can permanently raise the government from 35% to 45% of GDP, as Krugman might like. If you raise taxes as well, at least in the long run, it is sustainable. So it need not be private spending, but it does need to be (in the long run) spending that is paid for, as you indicated in your first paragraph.

    Does fiscal stimulus make the monetary policymakers job more difficult? I’m agnostic on that. With a NGDP futures market I think we could handle fiscal stimulus pretty well. And I do think the Fed handled fiscal austerity in 2013 reasonably well. Not as well as we might have liked, but GDP growth actually sped up a bit. But then they might have gotten lucky.

    Peter, There is no “what if.” The Japanese did it, and it didn’t work. Remember, I am talking in “concrete steppes” terms. That’s what this post is about. They ran huge deficits while massively increasing the monetary base. Those are facts the concrete steps people would view as important. Nick and I (and even Krugman) might focus on expectations about future monetary policy, and say policy wasn’t as expansionary as it looked. But if you believe in concrete steppes than what the Japanese did SHOULD HAVE WORKED.

    Saturos, Me too, one experiment at a time is enough. I was wondering if there were any cheap “Paypal” type systems out there.

    Steven, It works when the public rationally expects the injection is permanent (Argentina) and doesn’t work where the public rationally expects the injection is temporary (Japan.)

  14. Gravatar of ssumner ssumner
    6. October 2014 at 11:22

    Vivian, Yes, I’ve seen discussion of the paper, but have not read it. I don’t see QE working primarily through lower long term rates, so I worry less about Treasury policy than Summers does.

  15. Gravatar of ThomasH ThomasH
    6. October 2014 at 13:51

    I have not read the fine print of Larry Summers position on infrastructure investment, but I believe that implicit in it is the idea that the investments have positive NPV when evaluated at the low borrowing costs governments face during recessions resulting from the monetary authority has not maintaining NGDP growth.

    during recession

  16. Gravatar of ThomasH ThomasH
    6. October 2014 at 14:02

    I have not read the fine print of Larry Summers position on infrastructure investment, but I believe that implicit in it is the idea that the investments have positive NPV when evaluated at the low borrowing costs governments face during recessions resulting from the monetary authority has not maintaining NGDP growth. You imply that the investments in infrastructure in Japan do not have positive NPV’s. That’s bad.

    during recession

  17. Gravatar of Steven Kopits Steven Kopits
    6. October 2014 at 16:26

    Scott –

    If consumers have a high marginal propensity to save, then a helicopter drop may find its way back to the banks. True enough. On the other hand, do it enough, and people will get the message.

    I think the Noah article states that the savings rate for consumers in Japan is essentially zero, and that consumers have stopped buying government debt.

    The government is now forcing the insurers and pension funds to buy it, thus there is a kind of “forced sterilization”.

  18. Gravatar of Anonymous123 Anonymous123
    6. October 2014 at 19:23

    Scott, what is the difference between a temporary and permanent liquidity trap? And wouldn’t your critique apply no matter how the permanent monetary base injection was delivered?

  19. Gravatar of TravisV TravisV
    6. October 2014 at 19:50

    Kenneth Duda,

    Excellent discussion, thank you very much!

  20. Gravatar of TravisV TravisV
    6. October 2014 at 19:50

    Has anyone summarized this new Stiglitz paper?

    http://www.nber.org/papers/w20517

    “The paper argues that any theory of deep downturns has to answer these questions: What is the source of the disturbances? Why do seemingly small shocks have such large effects? Why do deep downturns last so long? Why is there such persistence, when we have the same human, physical, and natural resources today as we had before the crisis?

    The paper presents a variety of hypotheses which provide answers to these questions, and argues that models based on these alternative assumptions have markedly different policy implications, including large multipliers. It explains why the apparent liquidity trap today is markedly different from that envisioned by Keynes in the Great Depression, and why the Zero Lower Bound is not the central impediment to the effectiveness of monetary policy in restoring the economy to full employment.”

  21. Gravatar of Radford Neal Radford Neal
    6. October 2014 at 21:31

    “Japan did drop a trillion dollars out of a helicopter…”

    But of course, they actually did not. They didn’t even drop 100 trillion Yen out of a helicopter. Nor did they send a check for a million Yen to every Japanese citizen. As Steven Kipitz says, there certainly would have been inflation if they had. (Or if not, just increase that to 100 million Yen for every Japanese citizen. Are all those Japanese who have never even imagined having money like that really going to save it all, staying in their decrepit hovel, eating nothing but noodles, and working at a menial job they hate, when they could buy a nice home, eat well, maybe go back to school to learn a better trade…? No. Especially when any thinking person would know that as soon as other people start to spend their new money, it will become worthless, so saving is the opposite of prudence.)

    So I think your presentation is misleading. In particular, it’s a fundamental feature of actual helicopter drops that the distribution of cash cannot be undone.

  22. Gravatar of Roger Sparks Roger Sparks
    7. October 2014 at 05:31

    i think Radford has a valid point.

    The BOJ financed Toyota who built cars to be sold in America. Now Toyota holds American debt, or is it the BOJ that holds American debt?

    Notice that the value of this debt in Yen has increased from 76:1 to the present 110:1 when we look at it from the perspective of Toyota (BOJ). An excellent investment for Toyota (BOJ).

    Japanese who invested in America are currently winners compared to those Japanese who invested in Japan.

    Ahhhh, the dynamics of an competitive world!

  23. Gravatar of Nick Rowe Nick Rowe
    7. October 2014 at 05:51

    Radford: ” In particular, it’s a fundamental feature of actual helicopter drops that the distribution of cash cannot be undone.”

    Semantics aside (do we call it a “helicopter drop” if it can be undone?) you are saying the same thing as Scott.

    In your language: how can we tell if what looks like a helicopter drop really is a helicopter drop (i.e. one that cannot be undone)?

  24. Gravatar of TravisV TravisV
    7. October 2014 at 05:57

    Prof. Sumner,

    Yglesias has written some new posts you might find interesting:

    http://www.vox.com/2014/10/7/6921153/buybacks-dividends

    http://www.vox.com/2014/10/2/6889147/winship-tcherneva-inequality-debate

  25. Gravatar of TravisV TravisV
    7. October 2014 at 06:03

    “Traders Are Convinced This Indicator Means More Fed Easing Is Coming”

    http://www.businessinsider.com/breakevens-signal-more-easing-2014-10

    “Misra writes that the Fed’s method to ease in the coming months would most likely happen via “jawboning,” or what some have called “verbal easing….Basically, the Fed would emphasize that it could keep rates, as the popular refrain has gone over the past few years, “lower for longer.”

  26. Gravatar of Radford Neal Radford Neal
    7. October 2014 at 06:04

    Nick: But “semantics” is crucial here. Scott says “here’s something else that all practical men of the world believe; helicopter drops “work.” Not that they necessarily create real GDP growth, but they at least create inflation.”, and then claims that the “practical men” are wrong.

    But they’re not wrong. And if you use the phrase “helicopter drop” to refer to something that is not equivalent to a real helicopter drop, what phrase are you going to use to refer to something that IS equivalent to a real helicopter drop?

  27. Gravatar of MB. MB.
    7. October 2014 at 06:35

    Gali has a new paper on the subject.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2503395

    http://www.voxeu.org/article/effects-money-financed-fiscal-stimulus

    His conclusion is that helicopter drop would work well (in a sticky-prices model, which is to be expected).

  28. Gravatar of Scott Sumner Scott Sumner
    7. October 2014 at 07:01

    Thomas, I’m sure you are right, I was joking.

    Steve, It’s not a question of doing “enough,” it’s doing it permanently. Now in fairness if you do “enough” it will eventually be viewed as permanent.

    Anonymous, You asked:

    “Scott, what is the difference between a temporary and permanent liquidity trap? And wouldn’t your critique apply no matter how the permanent monetary base injection was delivered?”

    Permanent is when zero rates are expected to persist forever. Cash and bonds become identical.

    And yes to question 2.

    Radford, I think you missed the whole point. Of course an actual helicopter drop would probably have “worked” better, (although it would have been a lousy policy.) It would have impacted expectations more dramatically. But not necessarily, it could also be reversed. Economists use “helicopter drop” as a metaphor for combined fiscal/monetary expansions. And practical men tend to think combined fiscal monetary expansions will definitely work, which is not true. This post is much more about views on “concrete steppes” than helicopter drops.

    Roger, Not sure how that relates to this post; I’m talking about fiscal stimulus and money creation, not Toyota.

    Nick, Yes, however you interpret Radford he missed the point. The post was about actual Japanese policy, where “helicopter drop” was just a widely used metaphor for combined fiscal/monetary stimulus. I agree that actual helicopter drops are more likely to be viewed as irreversible, although eve they could be reversed if the government tried hard enough.

    Radford, OK, so you don’t like the metaphor (in which I simply followed the standard convention in economics.) Fair point. But then change it to “combined fiscal/monetary stimulus” and everything in my post is just as valid.

    MB, Works in theory but not in practice. So what’s wrong with the theory?

  29. Gravatar of ThomasH ThomasH
    7. October 2014 at 07:48

    By accident another Larry Summers piece came out

    http://www.ft.com/intl/cms/s/2/9b591f98-4997-11e4-8d68-00144feab7de.html#axzz3FQJbZTbb

    and he emphasizes several times, “well conceived” infrastructure and his example depends on the deficit financed investment yielding a return greater than the low, recession-determined, borrowing rate. “Keynesian” stimulus is just the application by the public sector of orthodox microeconomic inter-temporal optimization.

  30. Gravatar of Anand Anand
    7. October 2014 at 08:45

    (flippant) I guess Scott is a Keynesian after all:
    “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

    On a different note, this again goes to the counterfactual. What is to prevent the deflation to be even worse than it was in Japan, in the absence of fiscal stimulus? I suppose one could argue that the BoJ wouldn’t let it happen (in the counterfactual). But then, it is the BoJ’s fault, not the fiscal stimulus’s fault, if it didn’t allow inflation in the actual case.

  31. Gravatar of Scott Sumner Scott Sumner
    7. October 2014 at 08:49

    Thomas, I agree that’s his view, but good luck applying that in the real world.

    Anand, Of course that’s possible, but it doesn’t change my central argument about men with two feet on the ground. They believe the combined stimulus should work, and by “concrete steppes” metrics money was super expansionary, not deflationary.

  32. Gravatar of TallDave TallDave
    7. October 2014 at 09:07

    So there are really two questions:

    1) Why didn’t Japan experience growth?
    2) Why didn’t Japan experience inflation?

    The answer to the first question is just the good old Fatal Conceit — government isn’t very good at investing efficiently.

    The answer to the second seems to be little more than “Japanese investors understood that the BOJ would not allow inflation.” Other countries could not have amassed all this debt without triggering hyperinflationary expectations, but Japan could, because the BOJ was credible. At some point those expectations could come “unmooored” but it certainly hasn’t happened yet.

  33. Gravatar of TallDave TallDave
    7. October 2014 at 09:23

    ThomasH,

    implicit in it is the idea that the investments have positive NPV when evaluated at the low borrowing costs governments face during recessions resulting from the monetary authority has not maintaining NGDP growth. You imply that the investments in infrastructure in Japan do not have positive NPV’s. That’s bad.

    We don’t need to imply it, we know it for a fact. They did things like spend a billion dollars to build a bridge used by a few dozen people. No level of borrowing costs could justify that.

    We can all agree that buying chocolate on sale is better than paying full price, but morbidly obese diabetics shouldn’t eat ten pounds of M&Ms because they found a 5% off coupon.

  34. Gravatar of MB. MB.
    7. October 2014 at 10:10

    Dear Prof. Summer, remember your own post:

    https://www.themoneyillusion.com/?p=27608

    Two points:

    1) As you said, one cannot expect miracles.

    2) The question is the same as with QE (www.princeton.edu/~pkrugman/bernanke_paralysis.pdf) and it is not wether it works or not. It obviously does (you can prove it by contradiction as Bernanke does). The question is on which scale.

  35. Gravatar of MB. MB.
    7. October 2014 at 10:14

    *Dear Prof Sumner, I am sorry.

    Btw., I think this is exactly why Paul Krugman, Larry Sumners, Brad DeLong and some others prefer to advocate the use of fiscal policy in a liquidity trap…

    Not that unconventional monetary policies are not working — because they have to work, but rather that the scale of the required policies is too huge and it’s easier to use fiscal policy.

  36. Gravatar of Brian Donohue Brian Donohue
    7. October 2014 at 11:08

    @MB, we’ve been going gangbusters on fiscal policy for this whole century, and we have the $18 trillion federal debt and $550 billion federal deficit to prove it.

  37. Gravatar of Jason Smith Jason Smith
    7. October 2014 at 12:17

    The monetary base is a terrible model of inflation — pretty much any measure of money you could use must have a changing relationship between the definition of that unit of money and inflation.

    The market monetarist model for that changing relationship involves “expectations” — but does that make sense? Does the market in Japan expect all of the currency printed since the 1990s to be taken out of circulation in future?

    http://informationtransfereconomics.blogspot.com/2014/10/under-spell-of-expectations-fairy.html

  38. Gravatar of TallDave TallDave
    7. October 2014 at 13:04

    MB — it didn’t seem to work in Japan, most likely because there’s no such thing as a liquidity trap.

    Jason Smith — MM certainly doesn’t say expectations are the only factor mediating the relationship between monetary base and inflation, so it doesn’t require “all of the currency printed since the 1990s to be taken out of circulation in future,” it only requires markets to believe the BOJ will raise rates if it sees inflation.

  39. Gravatar of TallDave TallDave
    7. October 2014 at 13:15

    Really, I always wonder what liquidity trap advocates think would happen if the BOJ announced a new 5% inflation target. Nothing?

  40. Gravatar of W. Peden W. Peden
    7. October 2014 at 13:30

    Jason Smith,

    Your use of ‘M0’ seems nonstandard to me. M0 is always the monetary base, as far as I know, across all countries that use that term.

  41. Gravatar of TravisV TravisV
    7. October 2014 at 14:03

    Scott Winship responded to Yglesias here:

    http://www.forbes.com/sites/scottwinship/2014/10/03/the-inequality-non-explainer-explained

  42. Gravatar of MB. MB.
    7. October 2014 at 15:09

    Talldave,

    Then how do you explain that major central banks have huge difficulties at the ZLB to reach their target?

    “MB “” it didn’t seem to work in Japan, most likely because there’s no such thing as a liquidity trap.”

    It has nothing to do with the concept of liquidity trap… It is a policy which available during a liquidity trap while conventional policies are not.

    “Really, I always wonder what liquidity trap advocates think would happen if the BOJ announced a new 5% inflation target. Nothing?”

    Well, you do not seem to understand the concept of credibility. What matters is what people think the Central Bank CAN and WILL do, not only what it would like to.

    Anyway, I am now curious: how would you reach your target if QE / money-financed stimulus do not work and you’re at the ZLB? Only through expectations/forward guidance?

  43. Gravatar of MB. MB.
    7. October 2014 at 15:15

    “@MB, we’ve been going gangbusters on fiscal policy for this whole century, and we have the $18 trillion federal debt and $550 billion federal deficit to prove it.”

    Read my comment again and read Bernanke’s paper.

    By contradiction: if money-financed stimulus does not create any inflation, then the government can buy up the whole economy. Obviously it is absurd. (Same idea with why QE should do the job).

    Once again, the question is not whether it is effective or not but rather how much money you need to create.

  44. Gravatar of TallDave TallDave
    7. October 2014 at 17:56

    MB:Then how do you explain that major central banks have huge difficulties at the ZLB to reach their target?

    Simple, they don’t have any such difficulty. This should be so obvious! CBs can buy every asset in existence if they choose to, the concept of “difficulty” doesn’t exist in the context of CB inflation. That they keep making bad predictions about the effects of their policies speaks to their lack of economic omniscience, not any lack of monetary omnipotence.

    This is analogous to observing someone gently tapping on a pane of glass with a pillow, and when the pane doesn’t break quite as soon as he announces it will, concluding he must be having “huge difficulties” in breaking the glass, even though there’s a dusty sledgehammer lying there, unused.

  45. Gravatar of TallDave TallDave
    7. October 2014 at 18:21

    It has nothing to do with the concept of liquidity trap… It is a policy which available during a liquidity trap while conventional policies are not.

    If by “conventional policies” you mean “lowering interest rates” then this is true, but in much the same sense that you can blow your nose when you’ve stubbed your toe: noseblowing is certainly useful at times, but it’s a poor substitute for walking in terms of locomotion, especially when when it’s quite possibly to limp or grab a crutch for a bit until the pain goes away (i.e., use other monetary policy until interest rates rise).

    Really, I always wonder what liquidity trap advocates think would happen if the BOJ announced a new 5% inflation target. Nothing?” — Well, you do not seem to understand the concept of credibility. What matters is what people think the Central Bank CAN and WILL do, not only what it would like to.

    Again, there seems to be a lot of confusion about what “monetary sovereign” means. Every asset in existence!

    Anyway, I am now curious: how would you reach your target if QE / money-financed stimulus do not work and you’re at the ZLB? Only through expectations/forward guidance?

    Again, very simple: buy enough stuff to make the policy credible. See Nick’s post on the Chuck Norris effect. To clear a room, Chuck Norris only has to credibly threaten to beat up everyone who doesn’t leave the room (that may involve beating up some number of people, or not, depending on how much credibility he has with the people in the room). CBs have to do enough to make the markets believe they are really trying to hit the target (the Fed has pretty clearly indicated they consider missing low a “win”), and then they can hit essentially any arbitrary target.

    “How much QE will the Fed need to do, to get expected inflation to increase?” That is the wrong question to ask. The Fed needs to communicate its target clearly. And it needs to threaten to do unlimited amounts of QE for an unlimited amount of time until its target is hit. If that threat is communicated clearly, and believed, the actual amount of QE needed will be negative. The Fed’s balance sheet is much bigger than in normal times. But in order to shrink its balance sheet back to normal, the Fed must threaten to expand its balance sheet by an unlimited amount. And be seen to be ready to carry out that threat

  46. Gravatar of Nick Rowe Nick Rowe
    8. October 2014 at 01:49

    Radford “And if you use the phrase “helicopter drop” to refer to something that is not equivalent to a real helicopter drop, what phrase are you going to use to refer to something that IS equivalent to a real helicopter drop?”

    I think we should call it “a helicopter drop that is expected to be permanent”.

    Because we really do need to make that “expected to be permanent” bit explicit.

    Plus, that also gives us the phrase “a helicopter drop that is expected to be temporary”, which we would have to invent a new word for otherwise.

  47. Gravatar of Nick Nick
    8. October 2014 at 04:28

    MB,
    I’m puzzled as to why you think it’s easier to do more fiscal stimulus than we did at the ZLB than to do more unconventional monetary easing. Usually this is paired with an argument that unconventional policy could cause ‘instability’ or increases inequalitiy or something.
    It’s especially puzzling bc we are discussing what economists should, at the margin, encourage their readers to support. If prof sumner had advocated for more fiscal stimulus and his opponents had argued for more unconventional policy we would have ended up with roughly the same amount of stimulus and easier policy. Monetary policy is the thing professional economists have been given the most control over…
    Why should economist line up in favor of a policy solution that requires herding all the cats in congress when they have their own tool? If congress fails to follow through, should they let the economy suffer and say ‘we told you to pass a better law’? That’s how you lose credibility!
    Congress already passed a pretty good law giving professional economists a LOT of power to respond to nominal shocks.

  48. Gravatar of ssumner ssumner
    8. October 2014 at 04:45

    Talldave, The first question should be why didn’t NGDP rise. Then you split the question.

    MB, The scale of policies needed is actually quite small, far less than the QE we have already done. But I agree with you that those individuals may be under under the misapprehension that a lot would be needed. It’s hard to say, as the subject is so complex.

    Jason, You said:

    “The monetary base is a terrible model of inflation “” pretty much any measure of money you could use must have a changing relationship between the definition of that unit of money and inflation.”

    The base is not a model at all, and is certainly not perfectly correlated with prices.

    “The market monetarist model for that changing relationship involves “expectations” “” but does that make sense? Does the market in Japan expect all of the currency printed since the 1990s to be taken out of circulation in future?”

    The issue is reserves, not cash. If interest rates rise the BOJ will either have to take the excess reserves out of circulation, or raise IOR. That part is generally accepted by just about everyone.

    MB, You said:

    “Then how do you explain that major central banks have huge difficulties at the ZLB to reach their target?”

    This is a common misunderstanding. The problem is the wrong target, not the failure to hit it. The ECB hasn’t even been at the zero bound for most of the past 6 years, sometimes raising rates—WRONG TARGET. The BOJ raised rates in 2000 and 2006, WRONG TARGET. The Fed started tapering last year — WRONG TARGET.

  49. Gravatar of TallDave TallDave
    8. October 2014 at 05:50

    Plus, that also gives us the phrase “a helicopter drop that is expected to be temporary”, which we would have to invent a new word for otherwise.

    Helicoptemporary!

  50. Gravatar of TallDave TallDave
    8. October 2014 at 05:53

    Helicopterary!

  51. Gravatar of MB. MB.
    8. October 2014 at 06:11

    Nick,
    I agree with you that monetary policy should be favored over fiscal policy (the distributional effects etc. are not to be adressed by MP).

    But I think there’s as well a huge case for fiscal policy as a supplement (and I think this is the Krugman-Summers view): as the interest rate are very low and expected to remain so for a long time, the government should borrow to make some investment in infrastructure (projects whose NPV is positivie thanks to low borrowing costs), i.e there is kind of a free lunch.

    Scott,

    I do not think the problem is a wrong target but rather the lack of political will / power (see the legal problems of ECB with QE/Credit easing or the inflationistas in the US/Germany).

    I agree with you that Central Banks could reach their targets, but they are reluctant to use unconventional policies to do so. And credibility of another target needs Central Banks to be ready to use those policies (such as negative IOR in the case of ECB, but more negative).

  52. Gravatar of Nick Nick
    8. October 2014 at 09:40

    MB,
    The view you are describing is not what I get out of Krugman on the whole, and I really don’t identify it with Summers. PK sounds the way you are sounding sometimes, but not always.
    Since fiscal and monetary policy are set on different calendars (especially now that we can only get congress to squeeze out a few giant bills a year) so there are many moments when the question of how much more fiscal support is on the way is moot. In those moments it’s vital for people like PK to say clearly: ‘the FOMC still has the power to hit their long term targets and it is incumbent on them to do so.’
    Too often, after a legislative setback, I read a PK column saying that grievous mistakes have been made and the economy will now suffer.

  53. Gravatar of Tom Brown Tom Brown
    8. October 2014 at 23:31

    W. Peden, I had a thread with Mark Sadowski regarding “M0” a while back. Basically this is what I learned:

    1. Wikipedia is not to be trusted on this.
    2. M0 has never been used as a concept in the United States
    3. M0 was used in the UK but no longer
    4. Japan uses M0 for the “currency in circulation” essentially. Different than what the UK used to use it for.

    When Jason writes “M0” he’s using it in the same way the Japanese do: the currency in circulation (which includes bank vaults).

    Now all that was from memory because I’m too lazy to verify any of it (I’m no Mark Sadowski). But nonetheless I’d be surprised if I was very far from the mark (pun?) with that.

    BTW, how do I know that’s what Jason means? I’ve discussed it with him. He uses the terminology “Base money minus reserves” but that amounts to the same thing, or very nearly so.

  54. Gravatar of Tom Brown Tom Brown
    9. October 2014 at 00:11

    W. Peden, “MB” is the monetary base in the US I think, but I’m sure that’s not news to you. I think you and I discussed this M0 thing before. I found one old thread w/ Sadowski which also involved David Andolfatto and Daniel Thorton of the St. Louis Fed, but unlike I recall, I don’t see M0 there:

    https://www.themoneyillusion.com/?p=26531&cpage=2#comment-333585

    Mark was not happy w/ Dan’s response… Lol.

    “In my opinion Daniel Thornton has published some pretty questionable research papers in the past, so I already had a low opinion of him. But to not know that “Vault Cash” is part of “Currency in Circulation” is pretty inexcusable.”

  55. Gravatar of Tom Brown Tom Brown
    9. October 2014 at 00:17

    Scott, I think when Jason writes:

    “The monetary base is a terrible model of inflation”

    He means that

    P ~ MB

    Is a terrible model (where “~” means “goes as,” i.e., proportional, plus perhaps some small higher order terms). That’s how I read it anyway.

  56. Gravatar of W. Peden W. Peden
    9. October 2014 at 00:48

    Tom Brown,

    Thanks! That’s about as confusing and as ridiculous as I should have expected.

  57. Gravatar of Tom Brown Tom Brown
    9. October 2014 at 00:56

    TallDave, you write:

    “MM certainly doesn’t say expectations are the only factor mediating the relationship between monetary base and inflation, so it doesn’t require “all of the currency printed since the 1990s to be taken out of circulation in future,” it only requires markets to believe the BOJ will raise rates if it sees inflation.”

    I’m having a hard time parsing that:

    1. MM’s don’t say expectations are only factor mediating MB and inflation.

    2. Then you quote Jason starting at “all of the currency” but leave out the part where he precedes that with “expect.”

    3. And then you write “it only requires markets to believe” but “believe” is a synonym for “expect.”

    Also, I’m not sure you’d disagree, but Nick Rowe has said that monetary policy is 99% expectations (so yes, there is that remaining 1%):

    http://longandvariable.wordpress.com/2014/07/10/market-monetarist-views-are-a-mish-mash-of-the-good-and-the-silly-that-dont-belong-together-anyway/comment-page-1/#comment-1396

    Jason translated that as 99% question begging. Lol

    http://informationtransfereconomics.blogspot.com/2014/07/if-physics-blogs-were-like-economics.html?showComment=1405459173218#c5789880837825152440

  58. Gravatar of ssumner ssumner
    9. October 2014 at 05:04

    MB, You said:

    “But I think there’s as well a huge case for fiscal policy as a supplement (and I think this is the Krugman-Summers view): as the interest rate are very low and expected to remain so for a long time, the government should borrow to make some investment in infrastructure (projects whose NPV is positivie thanks to low borrowing costs), i.e there is kind of a free lunch.”

    We all agree on that, but it’s not fiscal stimulus if it’s cost effective when you ignore possible AD effects.

    I wish the US still knew how to build infrastructure, but we don’t.

    Regarding the target, I strongly disagree. Unless the ECB shifts to level targeting of prices (or something else equally effective), it will probably have little credibility. It is in danger of ending up like Japan. Tools are almost irrelevant at this point, it’s about targets.

    Tom, Jason needs to learn to communicate better. If you leave a comment saying the base is a poor model of inflation, people are going to think it has something to do with the post. But the post never claimed the base was proportional to inflation, never even implied it. Indeed I said the BOJ had done lots of QE with no inflation.

  59. Gravatar of TallDave TallDave
    9. October 2014 at 06:57

    Tom —

    1. Yes.
    2. Because his implication is that it actually has to happen at some point, which is clearly not true.
    3. Yes, implied was the fact the BOJ has to take some action in order to foster that belief.

    Nick Rowe has said that monetary policy is 99% expectations

    That sounds about right. Suppose I agreed to loan you one million dollars, interest-free, for a period of time to end at my discretion — oh, and I warn you that if you start to spend more money, it increases the likelihood I will ask for the money back. How much does your spending change, relative to if I tell you I won’t ever ask for the money back? I’d say 99% is about right.

    Jason translated that as 99% question begging.

    That would only make sense if there was no evidence CBs could set expectations, which is obviously wrong.

  60. Gravatar of Ray Lopez Ray Lopez
    9. October 2014 at 10:43

    Good example with Japan, though it has been said the monetary oriented Central Bank was pushing in the opposite direction from the fiscal stimulus oriented government.

    So all you practical men of the world who believe in concrete steppes, I ask you the following question. Which cherished belief are you going to give up?

    1. Concrete steeps are what matters, not expectations fairies.

    2. Huge helicopter drops will always create inflation.

    You don’t have to give up either view. You could also argue that inflation did occur, not in prices of good but in government debt, that long term will either have to be inflated away or defaulted on. So inflation is not dead, it’s only sleeping, maybe not like the parrot in Monty Hall? And actions do speak louder than words, always.

  61. Gravatar of Morgan Warstler Morgan Warstler
    9. October 2014 at 16:31

    Frankly, the best thing that could happen is for NGDP Futures is to use Bitcoin for deposit and payout.

    Think on it. Think about why BTC guys might want to support such a market, besides NGDPLT. You gotz subsidies.

  62. Gravatar of ssumner ssumner
    10. October 2014 at 07:22

    Ray, You said:

    “You don’t have to give up either view. You could also argue that inflation did occur, not in prices of good but in government debt, that long term will either have to be inflated away or defaulted on.”

    So hyperinflation causes very low long interest rates on 30 year bonds. That’s a theory I’ve never heard before!

  63. Gravatar of chris mahoney chris mahoney
    11. October 2014 at 10:37

    I would argue that Japan hasn’t had a helicopter drop since the “Nixon Shock”. Money growth has been anemic since the bursting of the bubble economy:
    https://research.stlouisfed.org/fred2/graph/?graph_id=200203

  64. Gravatar of ssumner ssumner
    11. October 2014 at 17:33

    Chris, The term “helicopter drop” refers to changes in the base, not M2. The base did rise rapidly.

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